School Districts Slow To Switch To Online Purchasers

They materialized on the Web about a year ago with such befuddling
names as Simplexis, Epylon, and Kawama.

Those sites and others promised to train the efficiency of the
Internet on the bureaucratic world of school purchasing, just as
electronic commerce was transforming the sale of goods and services in
the consumer and corporate markets.

They had big money behind them in the form of millions of dollars in
venture capital. One company, Simplexis.com, was able to snag former
U.S. Secretary of Education Lamar Alexander as its chairman.

But the companies soon faced some hard realities. First, school
districts didn't flock to their sites as quickly as they would have
hoped. Second, just as the school purchasing sites were getting off the
ground, Internet business models lost favor with investors, putting an
end to the quick march to public stock offerings and dot-com riches
enjoyed by older companies.

For More Information

Here are the World Wide Web sites for
the four leading companies helping schools purchase goods and
services over the internet:

A year later, some of the purchasing sites are already out of business
or are looking to merge. But others have adapted their business plans
and just may be poised to catch on.

"The good news is we're still here, and we're starting to get the
traction we had hoped to get nine months ago," said Mark L. Smith, a
senior vice president of Eschoolmall.com, based in Horsham, Pa. "The
adoption rate in schools [for online purchasing] is much slower than it
has been in traditional business."

Some observers view Eschoolmall as one of the three or four viable
online-purchasing Web sites aimed primarily at schools. The other
survivors are Simplexis and Epylon Corp., both based in San Francisco,
and Kawama.com, based in Santa Ana, Calif.

Kawama, however, was said by some observers to be down to a handful
of employees and seeking a buyer. The company was launched last year
with money from Sylvan Ventures, the venture capital arm of the
Baltimore- based education company Sylvan Learning Systems Inc.

Maura Hudson, the marketing director for Kawama, said an
announcement about "funding and strategy" for the company could come
this week.

"When you have a wide number of players, only a few will end up
surviving," she said.

School Secretary's Role

The idea behind the online-procurement model is simple: Get schools
to shed their time-consuming, labor-intensive purchasing practices, and
capture a piece of the estimated $85 billion they spend on supplies and
services each year.

A magazine ad from Epylon captured the basic inefficiencies involved
in the traditional model. Showing a high school microscope, the copy
read: "It took 7 faxes, 9 phone calls, and 3 weeks to buy this."

"The school secretary might have a catalog that is six months old,
so then there is a mistake on the order form because the product may no
longer be the same," said Ted Murguia, the senior vice president for
sales and partner services at Epylon, which was launched in late 1999
and is the oldest of the school procurement sites.

"The people who are doing the purchasing—teachers, maintenance
folks, school secretaries—we need to make their jobs easier," Mr.
Murguia added.

The companies share some basic strategies. They all partner with a
host of suppliers of office products, textbooks, cleaning supplies,
athletic equipment, and other goods. They have online versions of
product catalogs that allow teachers or purchasing officials to make
selections. They have systems for routing electronic forms, so that if
a teacher wants to buy chalk for the classroom, the principal can sign
off and then the purchasing official can check the district budget to
see if there is money available.

The companies have several revenue streams. First, they charge
transaction fees to suppliers, which is typical in electronic commerce.
Epylon takes anywhere from 2 to 5 percent of sales, Mr. Murguia
said.

The companies also typically charge districts licensing fees for
their software and for integrating it with their financial software.
Eschoolmall charges license fees ranging from $2,000 to $15,000 per
year, depending on district enrollment, plus additional fees for
systems integration or customization, the company said. Simplexis
charges similar fees.

In the past year, the companies have been fine-tuning their sites so
they can accommodate traditional public-sector purchasing practices,
such as requests for quotations, competitive bids, and an audit trail
that can be printed out.

Perhaps because school officials were slow to embrace the services,
Simplexis, Epylon, and Eschoolmall have found another way to market to
them—by partnering with companies that provide computers and
financial programs to schools. Simplexis has teamed with the
International Business Machines Corp., while Epylon has aligned itself
with Deloitte Consulting and Accenture, formerly known as Andersen
Consulting. Eschoolmall has partnered with accounting and consulting
firm PricewaterhouseCoopers. "The channeling strategy is very important
for us," said Mr. Smith of Eschoolmall.

Both Epylon and Simplexis had licensing agreements with Education
Week to reprint articles on their sites. Those agreements have
expired.

Creating a Market

For schools, online purchasing is supposed to bring cost savings by
demanding less time and effort from employees to process paper forms
and purchase orders. In districts that have begun using online
procurement, officials say those savings are real.

The 49,000-student Minneapolis district studied several online-
purchasing sites before contracting with Epylon recently. The district
already has an internal online finance system. It plans to integrate
Epylon with that system so school employees at the building level can
make purchases with the click of a mouse.

But even with only the partial integration of Epylon at district
headquarters, the processing cost of each purchase has dropped from
$354 to $219, officials calculated.

"It's almost like the difference between writing a letter and using
the phone," said Greg Mead, the district purchasing director. "I think
right now a lot of people are waiting to see how this works, but in two
years, most big school districts will be doing this."

In the 10,500-student Mentor, Ohio, school district, purchasing has
been pretty traditional, said Assistant Treasurer Bill Parkinson. A
teacher goes through a catalog, then turns in an order sheet to the
school secretary, who types it into the district's financial software
program. After going through various forms and approvals, the order is
completed.

"This costs us about $85 and can take four weeks to complete," Mr.
Parkinson said. Now the district is installing Simplexis' software,
which could mean "we cut our time from four weeks to 24 hours," he
said.

"That's more time for the school secretary to answer phones and deal
with parents," he added.

Peter J. Stokes, the executive vice president of Eduventures.com, a
Boston firm that researches education businesses, said "institutional
inertia" has been the main obstacle keeping more districts from
shifting to online purchasing.

"The challenge these companies face is making a market," he said.
"If they succeed, the returns should be phenomenal. But it's just very
early in the market."

Like most early-stage Internet businesses, the online-procurement
sites all confirm that they are not yet profitable. None has gone
public yet, and they aren't likely to do so in the near term.

Simplexis started with some $35 million in venture capital. As
business took off slowly, the company went through two rounds of
layoffs to keep costs down.

"As of today, we have about half that money in the bank," said its
chief executive, Amar Singh. "We expect to be cash- flow positive in
early 2002."

Simplexis now has 40 employees, down from a peak of about 70. It
isn't clear how involved Mr. Alexander is in the company on a
day-to-day basis. Simplexis executives tried to arrange an interview
with the former education secretary and presidential candidate, but
later said his busy schedule wouldn't permit it. Mr. Alexander is
teaching a course this spring at Harvard University's John F. Kennedy
School of Government, titled "The Ultimate Start-Up: The American
Presidential Campaign."

Epylon has raised some $51 million in venture funding, including
investments from Deloitte's and Accenture's venture arms. It has about
150 employees, Mr. Murguia said.

"We're here to build a business," he said. "As long as schools are
spending money, we're going to continue to grow this company."

Mr. Smith of Eschoolmall said his company was backed by small
private investors and has what it takes to be one of the survivors of
the shakeout.

"We think it will ultimately come down to two or three players," he
said. "We plan to be one of them."

Vol. 20, Issue 31, Page 8

Published in Print: April 18, 2001, as School Districts Slow To Switch To Online Purchasers

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